Six common legal mistakes entrepreneurs make, and how to avoid them

Welcome to another episode of Launched & Legal with Dayna Thomas, Esq., entrepreneurship attorney and law firm coach. Launched & Legal is an Atlanta Small Business Network original series dedicated to bringing entrepreneurs and business owners the best practices and tips for strategizing, legalizing, and monetizing their ventures.

Mistakes in life are inevitable, but legal mistakes in business can be costly. While there’s virtually no way to make your business 100% liability proof, there are ways to reduce the risk. But how can you do better if you don’t know any better? Well, I’m going to help you with that today, at least from a legal perspective. As a business attorney for several years, I’ve engaged with hundreds of entrepreneurs, many making the same mistakes. To build the business of your dreams, you have to make sure that it’s on a solid legal foundation. So today I’m going to share six common legal mistakes entrepreneurs make so you can avoid these pitfalls.

If you have questions or comments about today’s show, send Dayna a message or comment on Instagram @daynathomaslaw.

1. Operating as a sole proprietor or a corporation

So one thing that you probably know is that at some point you should establish a business entity for your company. Now, good advice depending on your type of business, would be that you should start your business entity towards the beginning. Now, I typically recommend a limited liability company, an LLC, for most business owners, especially those who are solo entrepreneurs, meaning there’s only one owner of the company. LLCs make it easy for you to run your business and not have to attend to many corporate formalities. A lot of entrepreneurs start out as a sole proprietor thinking that’s actually a business entity. It is not. No business owner should operate as a sole proprietor. A sole proprietor means that one day you just wake up and you say to yourself, “I’m going to own a business,” and you snap your fingers and you’re a sole proprietor.

Literally, that’s what it is. A sole proprietor is not anything that you should consider as a business owner because there is no liability protection. The whole point of having a business entity is to protect yourself from liabilities, whether that’s legal liabilities, financial liabilities, having a business entity, make sure that your business is viewed as a separate person from you. Business inevitably has risks. And so you want to make sure those risks are separate from you individually, so that if the business ever gets sued, there’s ever any debt for the business that can’t be paid or any type of liability, that’s not going to be against you as a person. So your personal assets are safe, your home, your car, money in your bank account, your wages, things like that are safe from what you’re doing in business. If you’re operating as a sole proprietor, that liability protection does not exist for you because you don’t have a separate business entity.

So do not make the mistake of operating as a sole proprietor, or as a corporation. Operating as a corporation when you are a new solo entrepreneur is very likely not to be the best decision. I think that a lot of entrepreneurs form corporations because they think that having a corporation or INC after their name makes it seem like their business is bigger than it really is, and people should trust them. Actually, that generates more liability for you, especially as a solo entrepreneur that might not be able to do it all. With the corporation, there are more requirements for you as a business owner. Those requirements are generally known as corporate formalities, meaning everything has to be formal. You have to have formal bylaws, you have to have shareholders agreements, you have to have stock certificates. You have to have meeting minutes, meaning that whenever there’s a decision made for your business, it has to be taken down as meeting minutes.

But when you are a solo entrepreneur, it is pretty much a waste of time to type up every single time that you make a decision or a major decision for your business. You should spend that time running your business and making money rather than having to follow these corporate formalities that is very difficult for anyone to follow 100%. And if you have a corporation and you do not follow these corporate formalities, if there ever is a liability situation for you such as a lawsuit or a debt collection, then it will be very easy to pierce the corporate veil. Which means get past that corporate protection or that entity protection that your corporation was supposed to provide, and you as a person will be liable. So we do not want to do that. Make sure that you’re not operating as a sole proprietor, meaning that you don’t have a business entity at all, and unless your lawyer specifically advises that you should be a corporation, you should not operate as a corporation.

You should opt for a limited liability company, which gives you strong liability protection with very little corporate formalities. 

2. Operating multiple business ventures under the same business entity

Now, what do I mean by that? If you have many different ventures that are unrelated, under the same business entity, then that also jeopardizes your liability protection. For example, if you have a hair salon and you also sell products and you also do real estate and you also have an online course and all of those business ventures operate under your one LLC, that is not a good decision and one of the worst legal mistakes. You do not want your different business ventures to be held or operated under the same entity because it joins their liability. So again, liability protection is critical for you as a business owner, but not only you as a business owner for your other businesses.

You want to make sure that your ventures operate under separate LLCs so that the liabilities of one company, for example, your real estate business, does not affect your other business. For example, your online course. If there’s ever a lawsuit that relates to one business and all of your other businesses are operated under the same LLC or the same entity, then guess what? Whoever is pursuing that matter against you will have access to the money and the assets that you have made from completely separate ventures because they’re all under the same business. It will be the business, the LLC, the company that’s sued. If there are multiple streams of revenue from different business ventures streaming into the same LLC, and there is a risk or liability for that LLC, even if the matter has nothing to do with the other business venture, that potential plaintiff or whoever is coming against you will have access to the funds and the money and the assets from your other business ventures.

You do not want that to happen. Now, I know that it can be cumbersome to operate separate LLCs. They all have separate operating agreements, they have separate bank accounts. You have to file annual registrations for each of them every year, but you decided to be an entrepreneur and not only an entrepreneur, a serial entrepreneur at that. So that is a blessing and you have to do it the right way. You cannot go the cheap or inexpensive route when it comes to running your business. Make sure that you do not make the mistake of operating several unrelated business ventures under the same LLC, because that does jeopardize a liability protection and could end up costing you more. 

3. Committing to a brand name without a trademark

Now, if you know me, you know that trademarks are one of my favorite topics because it’s so crucial.

It’s critical for every business owner. You should not commit to a brand name unless you know it’s available to trademark and you actually have a trademark application pending. Now, why is this important? It’s important because trademarks give you the exclusive right to use a brand name and anything confusingly similar to it in connection with your product or your service and anything related to it in the entire United States. So what you don’t want to happen is that you pick a brand name that you love so much, you slap it on your products, you have a whole bunch of inventory, or you start using it in connection with your service. It’s on social media, it’s everywhere, and you’ve already started investing in this, and you haven’t even checked to see if someone else has a trademark for it, for related products or services. Now, sometimes I hear people say, “You know what? I looked through the trademark database and I didn’t find anyone that uses this name.”

Now, that’s also a mistake because trademarks don’t only protect exact matches. It protects anything that’s confusingly similar. So if you take it upon yourself to do a trademark search and you’re only searching for an exact match, that can lead you down the wrong path. You have to make sure that your mark is available to trademark, that no one else has a trademark for it or anything confusingly similar to it, and that you actually have your trademark application pending. Because even if today you do a search and it’s cleared, but you don’t file your trademark application. By the time you launch, that could change. People are filing hundreds if not thousands of trademark applications every day. So there is a good chance that while you are waiting to get the money or waiting for the right time, that someone could file that trademark application before you.

And when that happens, it’s going to be very hard, if not impossible to do anything about it. So make sure that you take your brand seriously, make sure that you invest in your brand. You want to make sure that you are considering trademark protection, but not only considering it, taking action on filing your trademark application before you commit to a brand name. If you haven’t started using that brand yet, you can file an intent to use application, which means you can submit your trademark application because you do have a bonafide intention to use that mark, but you don’t have to provide evidence that you’re using it just yet. The trademark offers will give you several months, that really extends to about three years if you utilize all of your extensions to start using that mark. So make sure you avoid one of the most problematic legal mistakes of committing to a brand before you submit your trademark application and do a comprehensive trademark search. 

4. Not transferring copyright ownership

Now, I love talking about this because this is something that really affects just about every entrepreneur. Copyright is sometimes thought to only affect artists and musicians and those in the entertainment industry, but that’s not true. It’s huge in entertainment, but it’s also huge in entrepreneurship. Copyright is to protect original works of authorship that’s fixed in a tangible medium. Now, what does that mean? It just means that it is something that is creative or original to you. That is fixed in a tangible form, meaning it’s not just an idea or a concept. It’s actually something in tangible form, such as it’s written down or it’s in your phone, or it’s recorded on a recorder. Anything where you can fix it in a tangible form, and it’s not just a concept or idea, can be eligible for copyright protection as long as it has enough creativity.

Now, how does that affect you as an entrepreneur? Entrepreneurs have logos. A logo is a creative work that’s fixed in a tangible form, whether that’s on paper or on your computer, saved on your drive. That is eligible for copyright protection. But guess what? Here’s the rule. The default law is whoever creates it owns the copyright. It does not matter how much you paid that person. You could have paid them a million dollars to create a logo for you, but without a contract that transfers the copyright ownership from them to you or your business, they own that copyright for your logo, and you only have a license to use it that can be revoked at any time. So that doesn’t only affect entrepreneurs and with logos, it can be content on your website, it can be advertising material, it can be your podcast recording, it can be your script for a show.

It can be so many other things that you’re creating. Maybe you have a video to teach your clients about something that you post on your website. All of that is creative material that is often helped to be created by someone else, whether that’s a producer, a script writer, a logo designer, someone else. And so as an entrepreneur, you have to make sure that you have that conversation with whoever is creating that content for you or with you to make sure that they are willing to sign a copyright assignment agreement. A copyright assignment agreement transfers ownership of copyright from one person or entity to another. Or you can have a work for hire agreement, meaning you’re hiring this person to create something for you, and from the beginning, whatever they create will be owned by you or your company. The only way to transfer copyright ownership is a contract that is signed by the creator.

That is the only way. The same way that you cannot transfer copyright from a verbal agreement, unless you have a written contract that is signed by the creator, transferring ownership from them to you, specifically copyright ownership, then you only have a license to use work that was created for your business that can be revoked at any time. So don’t make that mistake. Make sure that you have copyright transfers for all content that you use in your business. 

5. Not having a contract with your co-owners

Now, there’s a lot of different types of contracts that you can have as a business owner and that you should have as a business owner. But for this, number five, I’m going to focus on one that’s really important, a contract with a co-owner of your business. Now, in the beginning when there’re business ideas and you’re just coming up with this exciting new business, and you have a friend or a partner that you are establishing this business with, that can be a very happy time.

You’re excited, you want to move forward. Each person is bringing something amazing to the table, and that’s something to be celebrated. However, you can’t get too far without having an agreement. You want to make sure that you have a contract in place that lays out how the business is going to be run. Now, if you have a limited liability company and LLC, that contract is called an operating agreement. Now, an operating agreement is crucial, especially if you have a business partner. An operating agreement details how the business is going to be run. It can have what each person’s responsibility is going to be. It can have, when profits will be distributed, will anybody get a salary? Can you leave the company? Can you just bring someone new into the company? From A to Z, how decisions will be made? Big decisions, small decisions. Can one person make a decision on their own because they’re their expert?

Or does it always have to be unanimous? Well drafted operating agreements are somewhere between 12 and 15 pages because there’s so many things to decide when running a business. This is a living, breathing document that’s going to travel with the business. And even though you and your co-owner right now may be on the same page, that’s excellent. It might not always be like that, actually it’s rarely always like that. So you want to make sure that you can avoid disputes by coming back to the operating agreement and saying, “Hey, what did we decide in the beginning? We decided that we would handle this situation like this.” And that way that can alleviate problems with your co-owners that are often friends or people that are close to you, and you can operate a business that can be thriving.

6. Commingling funds

Now, commingling funds is a legal concept. It’s also an accounting concept. Commingling funds essentially means mixing up your money. So a lot of times business owners, even if you do file your LLC, you might not open a separate bank account for your business. You need to open a separate bank account, a business bank account, for your business. What you should not do is commingle funds, meaning you get paid for your business, and that money goes into your personal bank account. That’s essentially like stealing money because you are not your business. The law sees your LLC or business entity as a separate person from you. So if someone pays your business and that money goes into your business bank account, you are commingling funds. Now, why is that important not to do? Because it jeopardizes your liability protection. One thing you always have to think about in business is, how can I keep my liability protection strong so that if I’m ever sued or if there’s ever a financial legal situation that that person pursuing does not have access to my personal assets?

Now, if you already are mixing your business and personal assets, they will have access to that. But sometimes you might even have a business bank account, but maybe you’re collecting money through PayPal, and that is your personal PayPal account. No, you need to create a separate PayPal account for your business. So one other thing that I want to mention is with a business bank account, it also can’t show that you’re just taking money out whenever you want. So you have an online course and you’re taking money out for groceries. That does not make sense unless it’s a particular situation. Maybe you are preparing for a dinner event or something like that to promote your business, but you have to make sure that your statements don’t show that you’re just pulling money out of your business bank account and transferring that to your personal account whenever you want. There should be a schedule for when you pay yourself.

So that’s something you should definitely talk to your accountant about, but you should not be taking money out of your business account whenever you need money personally, you have to wait until you get paid whenever that time has been decided. That time can be in your operating agreement, or it can be you being paid every two weeks as an employee or another way that you and your accountant decide. But make sure that you do avoid one of the worst legal mistakes by not commingling your money or commingling your funds when you have a business. Keep your business money separate from your personal money, because these are two separate entities.

Well, I hope today’s show help to educate and inspire you as you pursue your business goals. Be sure to share today’s show with someone who can benefit and visit MyASBN.com and subscribe. If you have any questions or comments about today’s show, I would love to hear from you, send me a message or comment on Instagram at @daynathomaslaw. Remember to tune in next week and every week to make sure your business is launched and legal.